ROME (Reuters) - Italy's president gave a strong indication on Wednesday that next year's election would be held in late February, as the country prepares to replace a technocrat government that has ruled for over a year.

President Giorgio Napolitano said he had "taken account" of a recommendation by the interior minister that the election be held on February 24 following two days of wrangling over a budget law that must be passed before parliament is dissolved.

The 2013 budget had been expected to pass by Friday but was delayed when Silvio Berlusconi's centre-right People of Freedom (PDL) party demanded more time to consider the bill.

PDL secretary Angelino Alfano agreed to the election date, indicating that his party would probably allow the budget to pass by the weekend and allow the election process to begin.

The delay to the budget bill caused Prime Minister Mario Monti to postpone an end-of-year news conference at which he had been expected to announce whether he intends to stand in the election.

A source close to Monti said he would not make any comment on his future until parliament was dissolved.

Italian news agencies quoted Andrea Riccardi, a government minister considered close to Monti, as saying he believed the premier would announce his decision on Saturday or Sunday.

The election, originally due in April, was brought forward after Berlusconi's party withdrew parliamentary support for Monti, prompting the former European commissioner to announce he would resign as soon as the budget was passed.

The leader of the centre-left Democratic Party, which is leading in opinion polls, called the delay in approval of the budget "indecent and unacceptable".

"You cannot make legislation like the budget law subject to party agendas," Pier Luigi Bersani said.

The PDL has been trailing badly in the opinion polls, but rose three points in a survey carried out after Berlusconi announced he would run. It hopes that his proven campaigning skills will reverse a months-long decline.

Financial markets shrugged off the uncertainty. The main measure of investor confidence, the spread between Italian and German 10-year bond yields, dropped below 300 basis points to reach the levels seen before Monti announced his resignation.

SPECULATION

Monti, appointed a year ago to lead a technocrat government at the height of a debt crisis that threatened the entire euro zone, is widely seen outside Italy as the best guarantor of financial stability.

He has so far declined to respond publicly to pressure from Italy and abroad for him to seek a second term, but has done nothing to dampen growing speculation that he will stand.

Without citing any sources, Italian newspapers said on Wednesday that Monti was ready to back a new centrist grouping set up by Ferrari Chairman Luca Cordero di Montezemolo, which wants him to remain in office.

It was not clear whether he would run as its candidate for prime minister or take a more back-seat role by publicly endorsing a party or setting out a recommended policy programme.

"Monti has taken his decision but he is respecting the rules and will wait for the dissolution of parliament," Pierferdinando Casini, head of the UDC party, which is part of the broad centrist alliance, told reporters.

Although Monti is the favourite of the business elite and Italy's European partners, his image among ordinary Italians is much less favourable and, according to a survey this week, 61 percent do not think he should stand for election.

He enjoys wide respect for restoring Italy's international credibility after the scandal-plagued Berlusconi era, but many say the mix of tax hikes and spending cuts he has imposed to rein in public finances have deepened a recession.

The same poll, by the SWG polling institute, put support for a centrist coalition including Montezemolo's group at 9.3 percent, although it indicated that figure would rise to 15.1 percent if Monti were to lead the alliance.

The centre-left Democratic Party, which has supported Monti in parliament, has been openly sceptical about the idea of a candidacy by the unelected premier, which it says risks tarnishing his authority. (Additional reporting by Giselda Vagnoni and Catherine Hornby, and by Francesco Guarascio in Brussels; Editing by Kevin Liffey)

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